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Ben Bernanke Is Running out of Ammo

Posted by Larry Doyle on August 10, 2010 4:24 PM |

What if you were playing a round of golf with a set number of balls and were restricted by how often you might be able to use specific clubs? Might feel somewhat overwhelmed, no? What if you faced this predicament when you realized that you were still many holes away from the clubhouse? Might feel increasingly overwhelmed, no? Why do I have this mental image of Ben Bernanke and his fellow Fed governors standing out on the farthest point of a golf course wondering just how the heck they are going to finish their round–that is, navigate the economy–and get back to the clubhouse. 

Let’s quickly review the Federal Reserve’s  statement released today. In the process, let’s take the pulse of the economy and  the Fed’s ability to impact it. From the Federal Reserve’s website,  

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In my opinion, that description right there is totally consistent with my assessment that our economy has ‘walking pneumonia’ as it undergoes significant structural changes. 

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

They do not dare admit that deflation is the greater fear.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

“Extended” is getting longer every time these governors get together. 

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

How do you ease policy when you have very few tools–clubs and balls– left in the bag? Reinvest principal from mortgage security paydowns. That form of easing is trying to hole out from 400 yards away with a 7-iron.   

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Right …and good luck.


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